2. Nonqualified Deferred Compensation – Today’s Perspective The Advisors Forum March 17, 2010 For advisor and financial professional information only. Not for distribution to the public.

3. Speaker Introduction Michael Stolbach, MBA, JD Vice President – Executive Benefits Consulting Education –Penn State University, undergraduate degree –University of Pennsylvania, MBA –American University, JD More than 30 years experience in the legal, nonqualified benefits and insurance community.  Serves advisors and plan sponsors as a consultative NQDC resource – plan design, financing alternatives & sales support.  Vice President – Executive Benefits Consulting, for Principal Financial Group  The Principal Financial Group currently provides administrative services to over 4,500 nonqualified plans representing over 4,100 employers. 2 For advisor and financial professional information only. Not for distribution to the public.

4. 3 Ideas to remember 409A provides a great Road Map for designing NQDC plans NQDC plans can solve multiple problems Keep the plans simple NQDC is a valued, mainstream benefit For advisor and financial professional information only. Not for distribution to the public.

5. “Excess” 457(b)457(f) Defined Benefit For ProfitNot For Profit 457(f) DB DC DB Deferred Compensation Solutions 4 For advisor and financial professional information only. Not for distribution to the public.

6. The retirement gap 5 For advisor and financial professional information only. Not for distribution to the public.

7. 6 Market trends among Plan Sponsors For advisor and financial professional information only. Not for distribution to the public.

8. Survey* 85% sponsor NQDC Plans 71% finance plan liabilities, 5% considering 91% credit returns of 401(k) investment option, stock index or company stock 68% credit earnings daily 97% use a 3 rd party administrator exclusively or in combination w/inside resources * 2009 Executive Benefits: Survey of Current Trends, Clark Consulting Prevalence of Nonqualified Plans More than just the “Big Guys” 7 For advisor and financial professional information only. Not for distribution to the public.

9. NQDC Expectations The “modern” NQDC plan design is being driven largely by the qualified plan world Daily valuation Internet access 24/7 On-line transactions Multiple investment options (self directed) Bells and whistles Recruit / reward / retain / retire 8 For advisor and financial professional information only. Not for distribution to the public.

10. Plan Design Considerations 1.Eligibility “Select group of management or highly compensated employees” 2.Compensation Salary, bonus, LTIP, 1099 income 3.Plan contributions Employee and employer contributions 4.Earnings crediting Multiple investment choices 9 For advisor and financial professional information only. Not for distribution to the public.

11. Plan Design Considerations 5. 5.Vesting Wide range of choices beyond qualified plans 6. 6.Benefit payment events Separation from service, death, disability, unforeseeable emergency, change in control, plan termination and education and in-service withdrawals 7. 7.Benefit payment options Lump sum or annual installments 8. 8.Security mechanisms Rabbi Trust 10 For advisor and financial professional information only. Not for distribution to the public.

12. A Popular Provision: In-Service Distribution A Popular Provision: In-Service Distribution Sample Plan Design/Operation The income tax would be payable in the year the money is actually received by the executive. Key Employee Base Income $150,000 Bonus $50,000 Key Employee elects to defer 10% of base pay and 50% of bonus Deferral Amounts: Base = $15,000 Bonus = $25,000 Total = $40,000 Objectives: 2 kids need college $$ Planning second home Build retirement Annual Deferral Elections Allocation 20% College Mary20% College Michael20% Beach House40% Retirement $16,000$8,000 June 2012 April 2014 Jan 2015 NRD 4 Payments 1 Payment 7 Payments 11 For advisor and financial professional information only. Not for distribution to the public.

13. 12 Generally required before the end of the preceding tax year Requires both time and form of payment Evergreen Elections are permitted Timing of Deferral Elections $Bonus$ Payment Dec 2010 1/1/11 6/30/11 Performance Based Elections 12/31/11 Q1 2012 For advisor and financial professional information only. Not for distribution to the public.

14. 13 Practical Application Nov-Dec enrollment for “regular” deferrals AND Performance Based Compensation –generally allow changes to PBC if elected prior to June (if on calendar year) Deferral Agreements may be creative –Example: 10% of salary then “ladder” bonus If bonus is less than x then defer 0 If bonus is between x and y then defer 25% If bonus is between y and z then defer 50% Deferral Elections are “irrevocable” –Can be suspended Unforeseeable emergency distributions For advisor and financial professional information only. Not for distribution to the public.

15. 14 Lump sum & annual installments are popular choices Elections can be different for multiple permissible distributions Subsequent Changes are permitted: –12 month advance notice –Payment(s) must be delayed at least 5 years Installment payments –Treated as “single” payment –Treated as separate payments Distribution Elections For advisor and financial professional information only. Not for distribution to the public.

16. 15 409A Separation of Service Leaving the company means just that Administrative Design Issue Plan Sponsor Considerations Design minimum attained age, length of service, or both to create distinction Not meet requirements = Lump sum distribution Do meet requirements = Distribution elected valid For advisor and financial professional information only. Not for distribution to the public.

17. Doctrine of Constructive Receipt Liability (Deferred Comp Account) Asset (COLI / Taxable Investments, Securities) 16 For advisor and financial professional information only. Not for distribution to the public.

18. 17 Plan Financing Options An “Excess” plan is an unfunded & unsecured contractual obligation (liability) to pay a future benefit. The company finances this liability in one of three ways: Unfinanced Taxable investments (mutual funds) Tax Deferred Variable COLI (corporate owned life insurance) The best approach depends on the company’s: 1.Income tax bracket 2.Cost of money 3.Earnings assumption 4.Realized vs. unrealized distributions 5.Cash flow For advisor and financial professional information only. Not for distribution to the public.

19. 18 Fortune 1000 Financing Techniques* *2009 Executive Benefits: Survey of Current Trends, Clark Consulting Total % equals 144% - the survey question allowed more than one response Corporate Owned Life Insurance (COLI) 61% Taxable Investments 45% ER Stock 23% Other 15% For advisor and financial professional information only. Not for distribution to the public.

20. The Executive Nonqualified "Excess" Plan SM from The Principal – Financing Techniques* COLI 67% 28% Unfinanced 5% Taxable Investments *Based on actual plan data for the Principal Financial Group  (The Principal  ) as of 06/30/2008 19 For advisor and financial professional information only. Not for distribution to the public.

21. Plan Financing Options Unfinanced Approach Advantages Simple Company benefits from ROA greater than growth in participant accounts Provides cash to grow the company Disadvantages Liquidity (increased risk to participant) Company liable for benefit regardless of earnings “Legacy vs. liability”- Future management responsible for cash flow needed to pay benefits 20 For advisor and financial professional information only. Not for distribution to the public.

22. Plan Financing Options Financed with Variable COLI Advantages Earnings accumulate “tax deferred” Tax-free distributions (subject to contract limitations/charges) Tax-free life insurance death proceeds Disadvantages Policy charges Process of underwriting Education 21 For advisor and financial professional information only. Not for distribution to the public.

23. COLI Financing COLI Financing – when it makes sense 1.Significantly reduces cash flow as a result of tax deferral 2.Tax arbitrage between cash flow out for tax paid on deferral and income tax benefit at distribution Earnings withdrawn from COLI policy tax free and paid out tax deductible as a deferred compensation expense Cost recovery at distribution 3.Income tax-free death benefit 22 For advisor and financial professional information only. Not for distribution to the public.

24. Plan Financing Options Financed with Taxable Investments Advantages Many investment options Direct link of earnings on assets to plan liabilities Disadvantages Higher cash flow to pay tax on earnings Transaction accounting & recordkeeping may be difficult 23 For advisor and financial professional information only. Not for distribution to the public.

25. Taxable Investments Taxable Investments – when it makes sense Plan Sponsor paying little to no tax Uncertain business succession Short time horizon 24 For advisor and financial professional information only. Not for distribution to the public.

26. Few COLI polices vs. policy per person Administrative efficiencies Simplicity = CFOs think less is more Aggregate Financing Aggregate Financing – An Attractive Choice 25 For advisor and financial professional information only. Not for distribution to the public.

27. Integrating NQDC with Qualified Plans Coordinate Benefits –Restore benefits reduced by definition of compensation in qualified plan Enhance Communication –Qualified and NQDC values on summary report –Consolidated plan information via integrated website –Retirement benefits consolidated for planning purposes Plan Administrative Services –Integrated deferral elections (“wrap” or “pour over” designs) –Integrated reporting of participant data Discounts on administrative fees 26 For advisor and financial professional information only. Not for distribution to the public.

28. Plan Administrative Services Liability tracking based on variable indexes Asset/Liability balancing daily valued –Minimize corporate financial risk –Minimize tax liabilities and cash flow Aggregate Financing of COLI –Few policies vs. policy per person –Better pricing via full underwriting (less cost to employer) Pre-409A and 409A account balances –Multiple “plans” are often the norm 401(k) type experience and then some Employer Needs 27 For advisor and financial professional information only. Not for distribution to the public.

29. 28 Future of Nonqualified Plans Looks bright… Congressional activity –$1 million annual addition cap –Contribution Only (not likely to include any earnings or average test) W-2 reporting still on the horizon Document Corrections Notice 2010-6 Inadvertent Error Corrections Notice 2008-113 For advisor and financial professional information only. Not for distribution to the public.

30. 29 Future of Nonqualified Plans More and more like 401(k) experience –ERs looking to retain HCEs Product evolution –Institutional pricing of COLI and taxable investments Administration –Better do it right –Communication is important –Flexibility to handle multiple plans & designs For advisor and financial professional information only. Not for distribution to the public.

31. What to do now? Identify deferred compensation plans Is it a best practices plan design? Evaluate plan administrative services capabilities Make sure the plan provider is doing it right 409A documentation & operation compliant 30 For advisor and financial professional information only. Not for distribution to the public.

32. Disclaimer Statement While this communication may be used to promote or market a transaction or an idea that is discussed in the publication, it is intended to provide general information about the subject matter covered and is provided with the understanding that The Principal is not rendering legal, accounting, or tax advice. It is not a marketed opinion and may not be used to avoid penalties under the Internal Revenue Code. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, or accounting obligations and requirements. Insurance issued and administrative services provided by Principal Life Insurance Company. Securities offered through Princor® Financial Services Corporation, 800/247- 1737, member SIPC. Principal Life and Princor are members of The Principal Financial Group, Des Moines, IA 50392. No part of this presentation may be reproduced or used in any form or by any means, electronic or mechanical, including photocopying or recording, or by any information storage and retrieval system, without prior written permission from the Principal Financial Group ®. Copyright ©2010 Principal Financial Services, Inc. t10031002y6 31 For advisor and financial professional information only. Not for distribution to the public.